Property development or property investment?

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Some property developers entered the market and spent significant sums of money renovating and developing a property with a view to selling it at a profit. The property is mortgaged.

They were subsequently unable to sell it at a reasonable price due to the housing market decline. To cover the mortgage interest and the other ongoing costs (service charge, ground rent) they let it at a market rent for 6 months. Now the property is vacant they are hoping to sell it and to resume their property development ambitions.

My question is, will HMRC accept they are property developers or will HMRC now insist that the property is treated as an investment for tax purposes? The owners of the property wish the property to be treated as a property development because of the large sum of money they have expended in renovating it which they believe they will lose otherwise.

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People with more knowledge of legislation will be able to give you a proper answer, but from a practical point of view you will probably be OK treating it as a development, if the let is purely a short term arrangement and that the owners intention is still to sell.

If accounts are being prepared then the property should be shown as stock/WIP and you might consider making a white space disclosure on the next tax return filed.

If the property is an investment then the base cost for capital gains tax is the purchase price plus any incidental costs at the time of purchase. As far as I know the renovation costs, despite being capital costs, do not figure in the capital gains computation and hence can not be matched against the selling price when the property is sold.

Property development obviates the need to distinguish between capital and revenue expenditure and all costs, including the renovation costs, can be matched against the selling price of the property when it is sold.

If anyone can confirm or refute my understanding I would be most grateful.

If its a company, the company can offset the non trading loan interest (debit) against the capital gain so in effect you would get relief indirectly. if its not a company then you are stuck on that part.